SUN FOCUS INVESTMENT LTD v. TANG SHING BOR AND ANOTHER

CACV 82/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 82 OF 2011

(ON APPEAL FROM HCA NO. 538 OF 2007)

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BETWEEN

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J U D G M E N T

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Hon Fok JA:

Introduction

1.  This action has not had a smooth procedural history.  The writ endorsed with a statement of claim was issued on 16 March 2007 and it was amended on 18 January 2008.

2.  By amended summons dated 16 July 2009, the defendants applied to strike out the amended statement of claim.  The strike out application was heard by Mr Recorder Shieh SC on 5 October 2009.  He ruled that the pleading was defective in various respects and should be struck out but he did not dismiss the action.  Instead, he afforded the plaintiff an opportunity to get its house in order by applying for leave to amend to file a fresh statement of claim.

3.  On 15 October 2009, the plaintiff duly applied for leave to file a fresh statement of claim.  That application was heard by Chung J on 27 April 2010 and 2 September 2010 and, by his Judgment dated 10 September 2010, the Judge granted the plaintiff leave to file a fresh statement of claim by way of amendment.

4.  The defendants appeal to this court, with leave[1], against the Judge’s exercise of discretion to grant such leave to amend.

The limitation issue

5.  The plaintiff’s claims, as now formulated in the fresh statement of claim for which leave to amend was granted, are for damages for breaches of contract and/or fiduciary duties.  In summary, it is alleged that these breaches relate to the overcharging of management fees by the defendants and the abandonment by the defendants of a loan advanced to a company controlled by them, as a result of which an inadequate distribution was made to the plaintiff in respect of its investment in a property development in Shanghai.

6.  It was the defendants’ case, not disputed by the plaintiff, that the relevant limitation period is six years from the date of accrual of the plaintiff’s causes of action[2] and it was accepted by the defendants that the date of the original writ, 16 March 2007, was within the relevant limitation periods for the claims now sought to be advanced.

7.  However, the application for leave to amend to file the fresh statement of claim was not made until 15 October 2009 and, it is contended by the defendants, as at that date, the plaintiff’s claims were out of time so that the defendants had a limitation defence to those claims.

8.  Accordingly, at the hearing before the Judge, the defendants resisted the amendment application on that basis (amongst others).

How the Judge dealt with the limitation issue

9.  On the amendment application, however, the Judge held that the plaintiff’s reliance on s. 26(1)(b) of the Limitation Ordinance, Cap. 347, the effect of which is to extend the limitation period in cases of deliberate concealment, would be a live issue that could be resolved at trial. He said:

“14. In relation to the breaches of agreement, the plaintiff relies on s. 26(1)(b), Cap. 347:-

‘...where in the case of any action for which a period of limitation is prescribed by this Ordinance, ... any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant ... the period of limitation shall not begin to run until the plaintiff has discovered the ... concealment ... or could with reasonable diligence have discovered it’.

15. In this connection, the plaintiff avers that there has been deliberate concealment; the over-charging and the loan abandonment only came to its knowledge in about June 2004: para. 30 to 31, draft fresh statement of claim.

16. In short, I agree with the plaintiff.  Accordingly, I conclude that the claims made in the fresh statement of claim may be found at trial to fall within ss. 26(1)(b), Cap. 347.”

Was there an error in the Judge’s exercise of discretion?

10.  The defendants appealed to this court on the basis that the Judge’s exercise of discretion to grant leave to the plaintiff to amend was flawed by his failure to have regard to the operation of the rule in s. 35(1) of the Limitation Ordinance (known as the relation back rule), which provides:

“(1) For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.”

11.  The causes of action sought to be pleaded by amendment in the present case constituted new claims made otherwise than by way of third party proceedings so that, by operation of s. 35(1)(b), the new claims would be deemed to have been commenced on the same date as the original action, i.e. on 16 March 2007.  As such, they would not be time-barred.

12.  But for the operation of the relation back rule, therefore, the fresh claims would have been time-barred since the summons for leave to amend was not issued until more than six years after the accrual of the causes of action. That being so, the grant of leave to amend would have the effect of depriving the defendants of a limitation defence and would prejudice the defendants to that extent.  It was therefore the defendant’s contention on appeal that the Judge’s view that the issue of limitation would be a live issue at trial was erroneous and vitiated his exercise of discretion in granting leave to amend.

13.  In support of this contention, the defendants relied on Welsh Development Agency v Redpath Dorman Long Ltd. [1994] 1 WLR 1409, a decision of the English Court of Appeal concerning s. 35(1) of the Limitation Act 1980[3], where Glidewell LJ said at p. 1425G-H:

“Our view is that Judge Hicks was correct in concluding that where section 35(1) does, or may well, give the plaintiff an advantage a different test, namely that enunciated by Purchas LJ in the Grimsby Cold Stores case, should be applied. In such a case, leave to amend by adding a new claim should not be given unless the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim, or can bring himself within R.S.C., Ord. 20, r.5.”

14.  However, the Judge’s approach was that any potential prejudice to the defendants by reason of the operation of the relation back rule, notwithstanding the amendment pursuant to the leave granted by him, would be avoided by the fact that limitation would be a live issue at trial.

15.  In my opinion, the Judge’s view that limitation would be a live issue at trial notwithstanding the grant of leave to amend was, with respect to the Judge, not correct since, by reason of the relation back rule, the new claims by amendment in the fresh statement of claim would be deemed to have been made on 16 March 2007, the date of the original writ.  On that basis, the new claims in the fresh statement of claim would have been made within six years of the accrual of the relevant causes of action and so there would be no limitation defence available to the defendants at the trial.[4]  The amendment would automatically deprive them of the advantage of the limitation defence and this would be unfair.

16.  It follows that the Judge’s exercise of discretion to grant leave to amend was vitiated by this error.

The options available to this court

17.  The Judge’s exercise of discretion being flawed, it follows that his grant of leave falls to be set aside and, in the usual case, where a judge’s exercise of discretion is set aside, it would then be open to the appellate court to exercise the same discretion afresh.

18.  However, in the circumstances of an application to amend to add new claims to an already existing action and where this court has set aside a judge’s grant of leave to amend to add those claims, there are, in my view, a number of alternatives to be considered, namely:

(1) first, we might refuse leave to amend on the basis that the plaintiff can issue a fresh writ pleading the new claims;

(2) secondly, we might exercise the fresh discretion ourselves and grant or refuse leave to amend; or

(3) thirdly, we might decline to exercise the fresh discretion ourselves but instead remit the application to amend to a judge of the Court of First Instance to do so.

19.  The first option above is one effectively arrived at by applying the approach to the grant of leave laid down in Welsh Development Agency v Redpath Dorman Long Ltd. since the default position is for the court to refuse leave unless (a) the plaintiff can show that the defendant does not have a reasonably arguable case on limitation which will be prejudiced by the new claim or (b) that the new cause of action arises out of the same or substantially the same facts as a cause of action in respect of which he has already claimed relief.  To this new action, the limitation defence could then be pleaded, unaffected by the relation back rule.  As Millet LJ (as he then was) observed in Paragon Finance plc v D B Thakerar & Co [1991] 1 All ER 400 at 404g:

“By this means the injustice to the defendant of depriving him of an arguable limitation defence is avoided without denying the plaintiff the right to bring a fresh action to which, if he is correct, there is no limitation defence.”

20.  This course was taken in Moulin Global Eyecare Holdings Ltd. v Olivia Lee Sin Mei [2010] 2 HKLRD 1096 at §26 as a means of dealing with potential limitation problems arising from a proposed application to amend (although Rogers VP there made it clear that it was not part of the function of the Court of Appeal to allow amendments and that any amendment to pleadings would have to be made in the proper and normal way).

21.  In the present case, I do not consider that this course would be appropriate because here the amendments sought to be made are to replace the original writ completely with a fresh statement of claim.  If leave to amend is refused and the plaintiff is left to issue a fresh writ, nothing of the original writ will remain and so the original action will effectively be struck out by reason of the failure to amend in that action.[5]  In those circumstances, the plaintiff would be prejudiced in that it would be deprived of the opportunity to take advantage of the relation back rule so that the new claims could be deemed to have been commenced on the same date as the original action.  I do not think this would be fair in the circumstances of this case.  In other actions, however, where the original action remains on foot, the issue of a fresh writ which can then be consolidated or tried together with the original action may be the convenient and cost-effective method of resolving the matter, in which case the limitation issue can be resolved at the trial of the consolidated action.

Should this court exercise the fresh discretion to grant or refuse leave to amend?

22.  In the usual case, it would be expected that the Court of Appeal would exercise the fresh discretion whether to grant or refuse leave to amend.  However, in this particular case, the position is not so straight forward for a number of reasons.

23.  The plaintiff contends that leave to amend should be granted because the defendants do not have a reasonably arguable limitation defence by reason of s. 26 of the Limitation Ordinance, alternatively the new claims arise from the same or substantially the same facts as a cause of action in respect of which he has already claimed relief (i.e. within RHC O.20 r.5(5)).

24.  The defendants challenged both these contentions.

25.  As I have already noted, the Judge below thought the s. 26(1)(b) point was at least arguable.  However, the defendants contended that the plaintiff’s reliance on this point was unsustainable because there was no plea of any factual averments to support the deliberate concealment of any fact relevant to the plaintiff’s right of action and also because there was no sufficient plea to support the contention that the plaintiff could not have discovered the relevant fact with reasonable diligence.

26.  Mr Charles Manzoni, leading counsel for the defendants,[6] submitted that an analysis of the original statement of claim showed that the defendants were aware of all the facts necessary to plead the causes of action now contained in the fresh statement of claim.  Thus, the original statement of claim pleaded: a representation that the property venture had made a loss (§10); that two cheques for part distribution of the property investment were drawn on 17 March 2003 (§12); that the plaintiff discovered in or about 2003 that the representation was untrue by reason of the inspection of certain books of account of the joint venture company by the plaintiff’s director, Mr Tang Ngai Piu, on 8 August 2003 (§13). This was all pleaded in the context of evidence showing that, in March 2000, Mr Tang was authorised on behalf of the joint venture company by which the property venture was being developed “to discuss and deal with all related matters of construction and sale of the [property] in co-operation with [the joint venture partner]” and also evidence of Mr Tang’s presence at a board meeting of the joint venture company on 1 August 2000 at which financial details of the project were discussed.

27.  Mr Manzoni also referred to Mr Tang’s own evidence, filed in this action in connection with an application for security for costs, in which he stated that he had inspected the joint venture company’s accounts on or about 8 August 2003 and had then instructed solicitors in Hong Kong to take legal action against the defendants.

28.  On the other hand, the crux of the plaintiff’s plea in this regard is that the distribution made on 17 March 2003 to Mr Tang on behalf of the plaintiff was inadequate but that the plaintiff did not know this until it obtained a report prepared by Shanghai Xing Zhong Certified Public Accountants Co. Ltd. which report was itself not created until 3 December 2003.  The facts contained in this Xing Zhong report were material to its causes of action and were deliberately concealed by the defendants.  It was only in April 2004 that Mr Tang gave instructions to lawyers in Shanghai to investigate the joint venture project and only in June 2004 that the plaintiff’s Shanghai lawyers obtained a copy of that report.  It would thus appear that the alleged period of concealment and the time frame for the discovery of the relevant facts by the exercise of reasonable diligence are both relatively short.  In any event, since the application for leave to amend was made on 15 October 2009, the plaintiff’s discovery of the Xing Zhong report only in June 2004 was within six years of that date.

29.  In this regard, it is to be noted that the date of application (rather than the date of the grant of leave to amend) is the relevant date for consideration of the issue of limitation: see the Court of Appeal’s decisions in Lim Ban Thoon v Chintung Securities Ltd [1991] 2 HKC 204 per Fuad VP at p. 211B and Bowardley Enterprises Limited & Anor v Millennium Group Limited, unrep., CACV 242/2005 per Cheung JA at §21, Yuen JA at §§43-45 and Chu J (as she then was) at §73.  However, there may also be an issue in the present case as to the actual date of application since the draft fresh statement of claim attached to the amendment summons was in fact superseded and replaced by a later version served sometime after the first hearing of the summons before the Judge on 27 April 2010 (but, since this was a matter on which we were not addressed in any detail, we are not in a position to resolve that issue).

30.  So far as the adequacy of the plea relating to s. 26 is concerned[7], I am not persuaded that I should hold on the basis of the materials before this court that this is not reasonably arguable.  I note that the plaintiff pleads the existence of a fiduciary duty between it and the defendants and also pleads (at §34 of the fresh statement of claim) a breach of fiduciary duty by the defendants in failing to inform the plaintiff of the existence of the Xing Zhong report and its contents.  Depending on the evidence, this plea may or may not satisfy s. 26(3) of the Limitation Ordinance which provides:

“For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

31.  In light of these considerations, I do not propose to say any more about the merits of the plaintiff’s reliance on the s. 26 point.  It seems to me that this is a matter which depends on evidence and, in the circumstances of this case, should be determined as an issue in the amendment application.  Whether this is called a preliminary issue or an issue in the application does not, it seems to me, much matter although where, as here, no part of the action would survive if the defendants were to succeed on the s. 26 point, it might be more accurate to refer to the issue as a preliminary one.[8]

32.  This was an approach we were invited to take by Mr Billy N.P. Ma, counsel for the plaintiff, in the alternative to his submissions seeking to uphold the Judge’s grant of leave.  In support of this approach he cited Busby v Cooper [1996] C.L.C. 1425, a latent damage case, in which the defendant appeared to have an arguable case on limitation so that applying the test in Welsh Development Agency v Redpath Dorman Long Ltd. leave to amend ought to be refused. However, the plaintiff there sought to rely on the extended limitation period under s. 14A of the Limitation Act 1980, the legitimacy of which reliance depended on the date at which the plaintiff acquired the relevant knowledge.  The English Court of Appeal held that in these circumstances it was permissible to order the trial of a preliminary issue on the question of the date of knowledge: see per Hirst LJ at p. 7 of the Lexis Transcript and also per Ward LJ at p. 8.[9]

33.  For his part, Mr Manzoni accepted that a direction that the s. 26 point be tried as an issue in the amendment application was a course open to this court.

34.  I turn then to address the question of whether the plaintiff can bring itself within RHC O.20 r.5(5) which provides:

“An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as the cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment.”

35.  Whether or not a new cause of action arises out of the same or substantially the same facts as are already pleaded is substantially a matter of impression: see Welsh Development Agency v Redpath Dorman Long Ltd. at p. 1418D.[10]

36.  In the court below, the Judge said this:

“13. In relation to the oral agreement, the struck out amended statement of claim already referred to an agreement made in 1993 (albeit called therein a “partnership agreement” at the time).  The gist of the terms set out in the amended statement of claim is similar to those set out in the draft fresh statement of claim.  It is therefore wrong to think that the agreement is only raised now.  The plaintiff may be able to establish at trial that this aspect falls within s. 35(5) or (6), Cap. 347 or Ord. 20 r. 5(5).”

37.  It will be apparent that, whilst the Judge considered the question of the oral agreement now relied upon in the fresh statement of claim, he did not reach a view on this question, expressing himself in terms that the plaintiff “may” be able to bring itself within RHC O.20 r.5(5) at trial.  Nor did he consider whether the new breaches arose out of the same facts or substantially the same facts as those originally pleaded.  Indeed, he appears to have thought otherwise, since he referred to those breaches in the context of the plaintiff’s reliance on s. 26(1)(b) of the Limitation Ordinance (in §14 of the Judgment quoted above).

38.  The issue of whether the new claims in the fresh statement of claim do arise out of the facts or substantially the same facts as the cause of action in respect of which relief has already been claimed in the action is therefore one which does not have the benefit of analysis by the Judge and, in the circumstances, I would in this case be inclined to remit the amendment application to the Court of First Instance for a decision on the amendment application to be made as a whole.

The Court’s general discretion to allow the amendment

39.  I would add that Mr Ma also submitted that the court retained a general discretion to allow an amendment after the expiry of a relevant limitation period by way of case management decision and that, here, in view of the delay on the part of the defendants in applying to strike out the original statement of claim, the balance of justice favoured the grant of leave to amend.

40.  I reject this submission, for which no authority was cited, as being without merit and contrary to established principle.

Disposition

41.  For the reasons given above, I would allow the appeal and set aside the Judge’s grant of leave to amend.  I would direct that the plaintiff’s summons for leave to amend dated 15 October 2009 be remitted to a judge of the Court of First Instance to be determined in the light of this Judgment, with the issue of the plaintiff’s reliance on s. 26 of the Limitation Ordinance to be tried as an issue in the amendment summons.  I do not propose to give directions as to the trial of that issue[11] but, in order to avoid delay, I direct that the plaintiff issue a case management summons returnable before a judge of the Court of First Instance within 14 days of this Judgment on the hearing of which directions for the disposition of the amendment summons can be given. Obviously, if the parties can agree suitable directions, the need for such a summons or hearing on the summons will be unnecessary.

42.  As for costs, I would set aside the Judge’s order below and make an order nisi that the plaintiff pay the defendants the costs of this appeal, to be taxed if not agreed, and that the costs below be costs in the amendment application.

Hon Lam J:

43.  I agree and have nothing to add.